The day after tomorrow
SINGAPORE, 6 February 2009 – The global financial landscape has reshaped significantly, states a new PricewaterhouseCoopers (PwC) paper, released today. In “The day after tomorrow’’, the paper provides a perspective of the global financial crisis and draws from the analyses, scenarios in the new financial services landscape.
Seven emerging themes and new models have been identified in “The day after tomorrow” setting the tone even as the fallout from the credit crisis continues, and financial services providers grapple with a new environment. These themes and imperatives are:
Commenting on the new financial services world order, Jeremy Scott, PwC Global Financial Services Chairman says:
- An accelerated shift of economic power towards the East – a key distinguishing feature of the new landscape
- Monetary vacuum – Capital, credit and liquidity vacuum
- A simpler, more transparent form of banking – a “Nouveau Classic” banking model replacing unsustainable, over-leveraged structures
- Governments “inside the tent’’ – raising significant conflicts of interest
- The pursuit of a “zero-risk” regulation – “Never again”, a view that will mean a stricter governance structure based on national and international regulations
- Unprecedented fiscal pressure – tax burdens and national debt rising in major economies
- The need for strategic foresight to move from survival mode to sustainable, competitive advantage
“Financial transformation of this kind is unprecedented and as the financial crisis has developed it has become clear that the only thing you can expect is the unexpected. Consequently, old ways of working may no longer apply in some instances and wholesale change across the sector can be predicted. The interdependency of the global markets combined with the vast array of stakeholders: Government, regulators, management and shareholders with interests in returning to less volatile times, make it even more vital that action to deal with uncertainty is taken.”
Implications of the emerging themes to the Asia Pacific economies include:
Nigel Vooght, PwC Central Cluster Financial Services Leader, comments:
- Shift in global power towards the East
The shift of financial power from the West to the East has accelerated. The credit crunch has burst the asset bubble predicated on the investment flows generated by the macroeconomic imbalances in a US-centric global economy. The new patterns of world trade and investment that emerge from this fundamental rebalancing will look very different from the US-centred system.
“We are moving to a multi-polar world where Western financial centres could be bypassed. Successful globalisation has always followed its customers and therefore banks will follow their customers’ natural trade routes. As the East invests to protect the natural resources it needs to fuel its economies, the banks will follow this investment.’’
Dominic Nixon, PwC Asia Financial Services Leader, notes:
“Trust and confidence are the axioms underpinning a reliable and stable financial system, undeniable as we see how quickly the crisis has destroyed trust and shattered confidence. In an accelerated realignment of financial power towards the east – financial centres in Asia has to be prepared to build and sustain trust and confidence if they are to emerge as winners in the longer term.’’
Dominic Nixon, PwC Asia Financial Services Leader, remarks:
- The rise of Nouveau Classic banking
A smaller, more tightly regulated banking system and the dominance of the universal banking model will be central features of a new banking landscape. The shadow banking system will largely be dismantled. Banks that relied heavily on capital markets for their liquidity and that were specialist rather than universal are having to restructure.
“Disintermediation in banking process has to an extent reduced transparency. Investors did not realise that the liquidity shown in the system was ‘not real’ in the sense of being available over the longer term.”
“In many ways, the classic banking model in Asia has been comparatively simpler and more risk averse than their international counterparts. The renaissance of the classic banking model where banks seek to retain a larger part of their origination and take on more responsibility for the due diligence to ensure credit quality – will mean that Asian banks must remain on their path towards greater transparency and strengthen their risk management culture.”
Nigel Vooght, PwC Central Cluster Financial Services Leader, points out:
- Government “inside the tent”
Governments are expected to intervene more heavily in the way the financial system operates, in order to stimulate worldwide economies. This intervention is already evident in the US and UK, with pressure being applied to state-supported banks with respect to re-possessions and foreclosures and small and medium enterprises (SME) lending. More conflict should be expected as Governments reflect society’s wishes and exert influence on banks’ governance, tax, dividend policy and compensation. After such a massive bail out, society expects that the banks will adjust their behaviour to reflect the wider public interest and not necessarily shareholder interests.
“Governments will be in financial services for some time to come as it provides the capital infrastructure for the financial system. Non-state supported banks – despite not receiving bailout funds, will also be subject to the same pressure to change as a result of government intervention. Public opinion will play a large role in shaping changes given the sheer scope of the bailout and the belief that it has bailed out not just the troubled banks but the entire banking system.”
Nigel Vooght, PwC Central Cluster Financial Services Leader, notes:
- The pursuit of “zero-risk” regulation
The fundamental weaknesses in the regulatory regime have been exposed, and material, substantive changes to the regulatory environment will be made. There is recognition that regulatory shortcomings cannot be dealt with on a national basis alone. The G20 has already outlined an Action Plan for Regulatory Reform. However, while establishing one regulatory college would be fraught with conflicts of interest, it is an approach that must be strongly reviewed. The on-shore sector will have more regulation in more areas. Overall, financial stability will be the primary concern and anything that affects it will be regulated in one form or another. This will be aligned with a greater influence from Government over state-supported banks’ strategies.
“In the pursuit of zero-risk regulation, regulators will scrutinise even more closely the adequacy of risk management frameworks, processes and compensation policies. Shortcomings in capital adequacy regulations must also be addressed.”
Dominic Nixon, PwC Asia Financial Services Leader, says:
- Unprecedented fiscal pressure
Tax implications will be great for Western Governments that will face intense fiscal pressure as the recession and the decline in asset prices both reduce tax revenues. Banks will face a short-term reprieve but, in the longer-term, taxes will have to go up. Given the importance of financial services to the economies of the developed world, it is natural that Governments will seek to tax the sector more heavily.
“Deleveraging will be a key point of tension between governments and financial institutions. Governments want to urge lending to mitigate the effects of the recession but banks will want to shrink their balance sheets and restore profitability.”
Dominic Nixon, PwC Asia Financial Services Leader, concludes:
- From survival mode to sustainable strategy
Financial institutions must resist the temptation to become completely reactive at the expense of longer-term considerations. At the same time, they must adjust to the realities of doing business in a world where the interest of multiple stakeholders – Governments and society in general – have become more important.
“We are seeing Asian financial institutions recognising what the new reality of an accelerated shift in power to the east will mean to them. There is clearly a search for sustainable business models. It is easy to lose sight of longer term trends in the face of a crisis of this scope but executives need to take decisions now on where they want to take their business in two to three years’ time.”
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*A copy of the paper ‘ The day after tomorrow ’ can be downloaded from here .
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